What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-09-08 compared with 2020-06-11 · 304 added, 122 removed, 176 unchanged (71% of the section changed)

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Some of the statements contained in this Form 10-Q and any documents incorporated herein by reference constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, the impact of the COVID-19 pandemic on our business and results of operations, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies.

All statements, other than statements of historical facts, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements which relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, the impact of the COVID-19 pandemic on our business and results of operations, expectations related to our acquisition of MIRROR, our prospects and strategies for future growth, the development and introduction of new products, and the implementation of our marketing and branding strategies.

In many cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "intends," "predicts," "potential" or the negative of these terms or other comparable terminology.

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We also offer fitness-related accessories.

During the second quarter of fiscal 2020, we acquired Curiouser Products Inc., dba MIRROR, for a purchase price of approximately $500.0 million, of which approximately $57.1 million is due to certain continuing employees subject to their continued employment through various vesting dates up to three years after the closing date of the transaction.

MIRROR is a leading in-home fitness company with an interactive workout platform that features live and on-demand classes.

The acquisition of MIRROR will bolster our digital sweatlife offerings and bring immersive and personalized in-home sweat, and mindfulness solutions to new and existing lululemon guests.

COVID-19 Pandemic

The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020.

The spread of COVID-19 has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers.

Government authorities in certain markets in which we operate have also issued orders that require the closure of non-essential businesses and people to remain at home.

We have taken actions to close retail locations and to reduce operating hours, and we continue to monitor the situation and work closely with local authorities to prioritize the safety of our people and guests.

The spread of COVID-19 has caused public health officials to impose restrictions and to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and lifestyle centers.

We have taken actions to temporarily close retail locations and to reduce operating hours, and we continue to monitor the situation and work closely with local authorities to prioritize the safety of our people and guests.

In February 2020, we temporarily closed all of our retail locations in Mainland China.

All of these locations have since reopened.

In March 2020, we temporarily closed all of our retail locations in North America, Europe, and certain countries in Asia Pacific.

Subsequent to May 3, 2020 , we began reopening our retail locations in these markets in line with the guidance from local authorities.

As of June 10, 2020 , 295 of our company-operated stores were open.

The stores in Mainland China reopened during the first quarter of fiscal 2020, and stores in other markets began reopening in accordance with local government and public health authority guidelines during the second quarter of fiscal 2020.

As of August 2, 2020, 492 of our company-operated stores were open.

Our distribution centers in Columbus, Ohio and Sumner, Washington were temporarily closed for one and two weeks, respectively, during the first quarter of fiscal 2020 due to COVID-19.

As of June 10, 2020 , all of our distribution centers were open.

Our retail locations and distribution centers are operating with precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and maximum occupancy levels.

As of August 2, 2020, all of our distribution centers were open.

Our retail locations and distribution centers are operating with restrictive and precautionary measures in place such as reduced operating hours, physical distancing, enhanced cleaning and sanitation, and limited occupancy levels.

This pandemic has also impacted the operations of our third party logistics providers and our manufacturing and supply partners, including through the closure or reduced capacity of facilities, and operational changes to accommodate physical distancing.

As the pandemic progresses, we may face further disruptions or increased operational and logistics costs throughout our supply chain.

As the pandemic continues, we may face further disruptions or increased operational and logistics costs throughout our supply chain.

There is significant uncertainty regarding the extent and duration of the impact that the COVID-19 pandemic will have on our store operations, the demand for our products, and on our supply chain.

It had a material adverse impact on our results of operations for the first quarter of fiscal 2020, and we expect it to continue to impact our results of operations, financial position, and liquidity.

It had a material adverse impact on our results of operations for the first two quarters of fiscal 2020, and we expect it to continue to impact our results of operations, financial position, and liquidity.

The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.

We remain confident in the long-term growth opportunities and our Power of Three growth plan and believe that we have sufficient cash and cash equivalents, and available capacity under our revolving credit facilities, to meet our liquidity needs.

As of May 3, 2020 , we had cash and cash equivalents of $823.0 million and the capacity under our committed revolving credit facility was $398.2 million .

As of August 2, 2020, we had cash and cash equivalents of $523.0 million and the capacity under our committed revolving credit facilities was $697.7 million.

Financial Highlights

For the first quarter of fiscal 2020 , compared to the first quarter of fiscal 2019 :

Net revenue decrease d 17% to $652.0 million .

On a constant dollar basis, net revenue decreased 16% .

Direct to consumer net revenue increased 68% , or increased 70% on a constant dollar basis.

Gross profit decrease d 21% to $334.4 million .

Gross margin decrease d 260 basis points to 51.3% .

Income from operations decrease d 75% to $32.8 million .

Operating margin decrease d 1,150 basis points to 5.0% .

Income tax expense decrease d 85% to $5.3 million .

Our effective tax rate for the first quarter of fiscal 2020 was 15.6% compared to 26.4% for the first quarter of fiscal 2019 .

Diluted earnings per share were $0.22 compared to $0.74 in the first quarter of fiscal 2019 .

For the second quarter of fiscal 2020, compared to the second quarter of fiscal 2019:

• Net revenue increased 2% to $902.9 million.

On a constant dollar basis, net revenue increased 3%.

• Company-operated stores net revenue decreased 51% to $287.2 million.

• Direct to consumer net revenue increased 155% to $554.3 million, or increased 157% on a constant dollar basis.

We held an online warehouse sale during the second quarter of fiscal 2020 which generated net revenue of $43.3 million.

• Gross profit increased 1% to $489.5 million.

• Gross margin decreased 80 basis points to 54.2%.

• Acquisition-related expenses of $11.5 million were recognized.

• Income from operations decreased 26% to $124.4 million.

• Operating margin decreased 520 basis points to 13.8%.

• Income tax expense decreased 17% to $37.3 million.

Our effective tax rate for the second quarter of fiscal 2020 was 30.0% compared to 26.4% for the second quarter of fiscal 2019.

• Diluted earnings per share were $0.66 compared to $0.96 in the second quarter of fiscal 2019.

This includes $9.5 million of after-tax costs related to the MIRROR acquisition, which reduced diluted earnings per share by $0.08 for the second quarter of fiscal 2020.

As the temporary store closures from COVID-19 have resulted in a significant number of stores being removed from our comparable store base, total comparable sales and comparable store sales are not currently representative of the underlying trends of our business.

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Refer to the non-GAAP reconciliation tables contained in the "Non-GAAP Financial Measures" section of this Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue and direct to consumer net revenue.

Management's Discussion and Analysis of Financial Condition and Results of Operations" for reconciliations between constant dollar changes in net revenue and direct to consumer net revenue and the most directly comparable measures calculated in accordance with GAAP.

Results of Operations

First Quarter Results

The following table summarizes key components of our results of operations for the quarters ended May 3, 2020 and May 5, 2019 .

Second Quarter Results

The following table summarizes key components of our results of operations for the quarters ended August 2, 2020 and August 4, 2019.

The percentages are presented as a percentage of net revenue.

Quarter Ended

(In thousands)

(Percentages)

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands) (Percentages)

Net revenue $ 902,942 $ 883,352 100.0 % 100.0 %

Cost of goods sold 413,441 397,556 45.8 45.0

Gross profit 489,501 485,796 54.2 55.0

Selling, general and administrative expenses 352,904 317,814 39.1 36.0

Amortization of intangible assets 724 — 0.1 —

Acquisition-related expenses 11,464 — 1.3 —

Income from operations 124,409 167,982 13.8 19.0

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Income tax expense 37,264 44,842 4.1 5.1

Net revenue decrease d $130.4 million, or 17% , to $652.0 million for the first quarter of fiscal 2020 from $782.3 million for the first quarter of fiscal 2019 .

On a constant dollar basis, assuming the average exchange rates for the first quarter of fiscal 2020 remained constant with the average exchange rates for the first quarter of fiscal 2019 , net revenue decreased $122.7 million , or 16% .

The decrease in net revenue was primarily due to the impact of COVID-19, including temporary closures of company-operated stores.

Decreased company-operated store net revenue as well as a decrease in net revenue from our other locations contributed to the decrease in net revenue.

This was partially offset by an increase in direct to consumer net revenue.

Net revenue on a segment basis for the quarters ended May 3, 2020 and May 5, 2019 is summarized below.

Net income $ 86,801 $ 124,990 9.6 % 14.1 %

Net revenue increased $19.6 million, or 2%, to $902.9 million for the second quarter of fiscal 2020 from $883.4 million for the second quarter of fiscal 2019.

On a constant dollar basis, assuming the average exchange rates for the second quarter of fiscal 2020 remained constant with the average exchange rates for the second quarter of fiscal 2019, net revenue increased $26.6 million, or 3%.

The increase in net revenue was primarily due to increased direct to consumer net revenue.

This was partially offset by a decrease in company-operated store revenue, as well as a decrease in net revenue from our other channels driven by temporary retail location closures as well as reduced operating hours and limited guest occupancy levels as a result of COVID-19.

Net revenue on a segment basis for the quarters ended August 2, 2020 and August 4, 2019 is summarized below.

The percentages are presented as a percentage of total net revenue.

Quarter Ended

(In thousands)

(Percentages)

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands) (Percentages)

Company-operated stores $ 287,201 $ 583,756 31.8 % 66.1 %

Direct to consumer 554,302 217,636 61.4 24.6

Other 61,439 81,960 6.8 9.3

Net revenue $ 902,942 $ 883,352 100.0 % 100.0 %

Company-Operated Stores.

Net revenue from our company-operated stores segment decrease d $246.5 million , or 49% , to $260.0 million in the first quarter of fiscal 2020 from $506.4 million in the first quarter of fiscal 2019 .

The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19.

All of our stores in North America, Europe, and certain countries in Asia Pacific were closed for a significant portion of the quarter.

Net revenue from our company-operated stores segment decreased $296.6 million, or 51%, to $287.2 million in the second quarter of fiscal 2020 from $583.8 million in the second quarter of fiscal 2019.

The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19, including temporary store closures, reduced operating hours, and occupancy restrictions.

Direct to Consumer.

Net revenue from our direct to consumer segment increase d $142.2 million , or 68% , to $352.0 million in the first quarter of fiscal 2020 from $209.8 million in the first quarter of fiscal 2019 .

Net revenue from our direct to consumer segment increased $336.7 million, or 155%, to $554.3 million in the second quarter of fiscal 2020 from $217.6 million in the second quarter of fiscal 2019.

Direct to consumer net revenue increased 157% on a constant dollar basis.

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This was partially offset by a decrease in dollar value per transaction.

There was a shift in the way guests shopped in the first quarter of fiscal 2020 as a result of COVID-19, with more guests shopping online instead of in-store, primarily due to temporary store closures.

Net revenue from our other segment decrease d $26.1 million , or 40% , to $40.0 million in the first quarter of fiscal 2020 from $66.0 million in the first quarter of fiscal 2019 .

This decrease was primarily the result of the temporary closures of our other retail locations as a result of COVID-19.

Gross profit decrease d $87.3 million , or 21% , to $334.4 million for the first quarter of fiscal 2020 from $421.7 million for the first quarter of fiscal 2019 .

Gross profit as a percentage of net revenue, or gross margin, decrease d 260 basis points to 51.3% in the first quarter of fiscal 2020 from 53.9% in the first quarter of fiscal 2019 .

The shift in the way guests are shopping continued in the second quarter of fiscal 2020 as a result of COVID-19, with more guests shopping online instead of in-store.

During the second quarter of fiscal 2020, we held an online warehouse sale in the United States and Canada which generated net revenue of $43.3 million.

We did not hold any warehouse sales during the second quarter of fiscal 2019.

Net revenue from our other segment decreased $20.5 million, or 25%, to $61.4 million in the second quarter of fiscal 2020 from $82.0 million in the second quarter of fiscal 2019.

This decrease was primarily the result of COVID-19, including temporary location closures, reduced operating hours, and occupancy restrictions.

Gross profit increased $3.7 million, or less than 1%, to $489.5 million for the second quarter of fiscal 2020 from $485.8 million for the second quarter of fiscal 2019.

Gross profit as a percentage of net revenue, or gross margin, decreased 80 basis points to 54.2% in the second quarter of fiscal 2020 from 55.0% in the second quarter of fiscal 2019.

The decrease in gross margin was primarily the result of:

an increase in occupancy and depreciation costs as a percentage of revenue of 330 basis points, primarily due to lower net revenue;

an increase in costs as a percentage of revenue related to our distribution centers of 100 basis points primarily due to lower net revenue;

• an increase in costs as a percentage of revenue related to our distribution centers of 130 basis points;

• an unfavorable impact of foreign exchange rates of 20 basis points.

This was partially offset by an increase in product margin of 180 basis points.

The increase in product margin was primarily due to lower product costs, and a favorable mix of higher margin product, partially offset by higher markdowns.

This was partially offset by a decrease in costs related to our product departments as a percentage of revenue of 40 basis points, and a decrease in depreciation and occupancy costs as a percentage of revenue of 30 basis points.

Product margin was consistent with the second quarter of fiscal 2019 primarily due to lower product costs and product mix, offset by higher markdowns.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increase d $8.7 million , or 3% , to $301.7 million in the first quarter of fiscal 2020 from $292.9 million in the first quarter of fiscal 2019 .

Selling, general and administrative expenses increased $35.1 million, or 11%, to $352.9 million in the second quarter of fiscal 2020 from $317.8 million in the second quarter of fiscal 2019.

The increase in selling, general and administrative expenses was primarily due to:

an increase in head office costs of $7.6 million , comprised of:

an increase in other costs of $18.2 million primarily due to increases in depreciation, information technology costs, brand and community costs, and other head office costs;

a decrease in employee costs of $10.6 million primarily due to decreased incentive and stock-based compensation expense;

• an increase in costs related to our operating channels of $38.7 million, comprised of:

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– an increase in other costs of $19.2 million primarily due to increased digital marketing expenses;

a decrease in employee costs of $5.4 million primarily due to lower incentive compensation expenses due to temporary store closures as a result of COVID-19;

The increase in selling, general and administrative expenses was partially offset by $14.3 million of government payroll subsidies which were recognized during the first quarter of fiscal 2020, and by an increase in net foreign exchange and derivative revaluation gains of $1.2 million .

As a percentage of net revenue, selling, general and administrative expenses increased 890 basis points, to 46.3% in the first quarter of fiscal 2020 from 37.4% in the first quarter of fiscal 2019 .

– a decrease in employee costs of $17.4 million primarily due to lower incentive compensation expenses in our company-operated store and other channels;

• an increase in head office costs of $14.3 million, comprised of:

– an increase of $15.8 million primarily due to increases in information technology costs, professional fees, and depreciation;

– a decrease in employee costs of $1.5 million primarily due to decreased travel and decreased incentive compensation expense, partially offset by increased salaries and wages expense as a result of headcount growth, and stock-based compensation expense;

• an increase in net foreign exchange and derivative revaluation losses of $3.0 million.

The increase in selling, general and administrative expenses was partially offset by $20.9 million of government payroll subsidies which were recognized during the second quarter of fiscal 2020.

As a percentage of net revenue, selling, general and administrative expenses increased 310 basis points, to 39.1% in the second quarter of fiscal 2020 from 36.0% in the second quarter of fiscal 2019.

Amortization of intangible assets

Amortization of intangible assets was $0.7 million in the second quarter of fiscal 2020.

This was primarily the result of the recognition of intangible assets of $85.0 million in the second quarter of fiscal 2020 as a result of our acquisition of MIRROR.

We did not recognize an expense for the amortization of intangible assets in the second quarter of fiscal 2019.

Acquisition-related expenses

As a result of our acquisition of MIRROR in the second quarter of fiscal 2020, we recognized acquisition-related expenses of $11.5 million in the second quarter of fiscal 2020.

This included transaction and integration related costs of $7.2 million for advisory and professional services, and integration costs subsequent to the acquisition.

This also included acquisition-related compensation of $5.0 million for the partial acceleration of vesting of certain options and deferred

consideration due to certain continuing MIRROR employees.

Acquisition-related expenses were partially offset by a $0.8 million gain recognized on our existing investment.

We did not have acquisition-related expenses in the second quarter of fiscal 2019.

Please refer to Note 3 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information.

Income from Operations

Income from operations decrease d $96.1 million , or 75% , to $32.8 million in the first quarter of fiscal 2020 from $128.8 million in the first quarter of fiscal 2019 .

Operating margin decrease d 1,150 basis points to 5.0% compared to 16.5% in the first quarter of fiscal 2019 .

Income from operations decreased $43.6 million, or 26%, to $124.4 million in the second quarter of fiscal 2020 from $168.0 million in the second quarter of fiscal 2019.

Operating margin decreased 520 basis points to 13.8% compared to 19.0% in the second quarter of fiscal 2019.

On a segment basis, we determine income from operations without taking into account our general corporate expenses.

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Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.

Segmented income (loss) from operations for the quarters ended May 3, 2020 and May 5, 2019 is summarized below.

Segmented income (loss) from operations for the quarters ended August 2, 2020 and August 4, 2019 is summarized below.

The percentages are presented as a percentage of net revenue of the respective operating segments.

Quarter Ended

(In thousands)

(Percentage of segment revenue)

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands) (Percentage of segment revenue)

Segmented income (loss) from operations:

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Direct to consumer 237,595 86,618 42.9 39.8

Other 2,587 16,418 4.2 20.0

234,889 257,352

General corporate expense 98,292 89,370

Amortization of intangible assets 724 —

Acquisition-related expenses 11,464 —

Income from operations $ 124,409 $ 167,982

Company-Operated Stores .

Income from operations from our company-operated stores segment decrease d $151.1 million , or 125% , to a loss of $30.2 million for the first quarter of fiscal 2020 from income of $120.9 million for the first quarter of fiscal 2019 .

The decrease was primarily the result of decrease d gross profit of $177.5 million which was primarily due to temporary store closures resulting from COVID-19, and lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

This was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including the recognition of government payroll subsidies, and lower credit card fees, distribution costs, and packaging costs primarily as a result of lower net revenue.

Additionally, there was a decrease in employee costs, primarily due to lower incentive compensation expenses due to temporary store closures.

Income from operations from our company-operated stores segment decreased $159.6 million, or 103%, to a loss of $5.3 million for the second quarter of fiscal 2020 from income of $154.3 million for the second quarter of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $209.3 million which was primarily due to lower net revenue as a result of the impact of COVID-19 restrictions, and lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

This was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue, and due to the recognition of government payroll subsidies and lower community costs.

Income from operations as a percentage of company-operated stores net revenue decreased primarily due to lower gross margin and deleverage on selling, general and administrative expenses.

Direct to Consumer.

Income from operations from our direct to consumer segment increase d $77.6 million , or 98% , to $156.9 million for the first quarter of fiscal 2020 from $79.3 million for the first quarter of fiscal 2019 .

The increase was primarily the result of increase d gross profit of $103.2 million which was primarily due to increased net revenue as more guests shopped online in the first quarter of fiscal 2020 as a result of COVID-19, and due to higher gross margin.

This was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs and credit card fees as a result of higher net revenue, as well as higher digital marketing expenses.

Income from operations as a percentage of direct to consumer net revenue increased 680 basis points primarily due to higher gross margin and leverage on selling, general and administrative expenses.

Income from operations from our other channels decrease d $12.9 million , or 102% , to a loss of $0.3 million for the first quarter of fiscal 2020 from income of $12.6 million for the first quarter of fiscal 2019 .

The decrease was primarily the result of decrease d gross profit of $13.0 million which was primarily due to decreased net revenue, primarily due to temporary store closures resulting from COVID-19.

Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses and lower gross margin.

Income from operations from our direct to consumer segment increased $151.0 million, or 174%, to $237.6 million for the second quarter of fiscal 2020 from $86.6 million for the second quarter of fiscal 2019.

The increase was primarily the result of increased gross profit of $222.2 million which was primarily due to increased net revenue and higher gross margin.

This was partially offset by an increase in selling, general and administrative expenses primarily due to higher variable costs including distribution costs, credit card fees, and packaging as a result of higher net revenue, as well as higher digital marketing expenses.

Income from operations as a percentage of direct to consumer net revenue increased 310 basis points primarily due to leverage on selling, general and administrative expenses and higher gross margin.

Income from operations from our other channels decreased $13.8 million, or 84%, to $2.6 million for the second quarter of fiscal 2020 from $16.4 million for the second quarter of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $9.2 million which was primarily due to decreased net revenue.

This was partially offset by an increase in selling, general and administrative expenses primarily due to an increase in marketing costs, partially offset by decreased operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue.

Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses.

General Corporate Expense.

General corporate expense increase d $9.7 million , or 12% , to $93.8 million for the first quarter of fiscal 2020 from $84.1 million for the first quarter of fiscal 2019 .

This increase was primarily due to increases in depreciation, information technology costs, and as a result of donations made through our Ambassador Relief Fund that provided grants to fitness studio owners impacted by COVID-19.

The increase in general corporate expense was partially offset by a decrease in head office employee costs, and an increase in net foreign exchange and derivative revaluation gains of $1.2 million .

General corporate expense increased $8.9 million, or 10%, to $98.3 million for the second quarter of fiscal 2020 from $89.4 million for the second quarter of fiscal 2019.

This increase was primarily due to increases in depreciation, information technology costs, and professional fees, and an increase in net foreign exchange and derivative revaluation losses of $3.0 million.

The increase in general corporate expense was partially offset by a decrease in incentive compensation and the recognition of government payroll subsidies.

Other Income (Expense), Net

Other income, net decrease d $1.2 million , or 51% , to $1.2 million for the first quarter of fiscal 2020 from income of $2.4 million for the first quarter of fiscal 2019 .

Other income, net decreased $2.2 million, or 119%, to an expense of $0.3 million for the second quarter of fiscal 2020 from income of $1.9 million for the second quarter of fiscal 2019.

The decrease was primarily due to a decrease in net interest income.

Income Tax Expense

Income tax expense decrease d $29.3 million , or 85% , to $5.3 million for the first quarter of fiscal 2020 from $34.6 million for the first quarter of fiscal 2019 .

The effective tax rate for the first quarter of fiscal 2020 was 15.6% compared to 26.4% for the first quarter of fiscal 2019 .

The decrease in the effective tax rate was primarily due to an increase in tax deductions related to stock-based compensation which, as a result of the lower pre-tax income for the quarter, represented a higher proportion of income before income tax expense and so reduced the overall effective tax rate.

Net income decrease d $68.0 million , or 70% , to $28.6 million for the first quarter of fiscal 2020 from $96.6 million for the first quarter of fiscal 2019 .

This was primarily due to a decrease in gross profit of $87.3 million , an increase in selling, general and administrative expenses of $8.7 million , and a decrease in other income (expense), net of $1.2 million , partially offset by a decrease in income tax expense of $29.3 million .

Income tax expense decreased $7.6 million, or 17%, to $37.3 million for the second quarter of fiscal 2020 from $44.8 million for the second quarter of fiscal 2019.

The effective tax rate for the second quarter of fiscal 2020 was 30.0% compared to 26.4% for the second quarter of fiscal 2019.

The increase in the effective tax rate was due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 110 basis points, and due to new regulations which resulted in additional foreign tax credits being recognized in the second quarter of fiscal 2019.

Net income decreased $38.2 million, or 31%, to $86.8 million for the second quarter of fiscal 2020 from $125.0 million for the second quarter of fiscal 2019.

This was primarily due to an increase in selling, general and administrative expenses of $35.1 million, acquisition-related expenses of $11.5 million, amortization of intangible assets of $0.7 million, and a decrease in other income (expense), net of $2.2 million, partially offset by an increase in gross profit of $3.7 million, and a decrease in income tax expense of $7.6 million.

First Two Quarters Results

The following table summarizes key components of our results of operations for the first two quarters ended August 2, 2020 and August 4, 2019.

The percentages are presented as a percentage of net revenue.

Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands) (Percentages)

Net revenue $ 1,554,904 $ 1,665,667 100.0 % 100.0 %

Cost of goods sold 731,001 758,151 47.0 45.5

Gross profit 823,903 907,516 53.0 54.5

Selling, general and administrative expenses 652,510 610,722 42.0 36.7

Amortization of intangible assets 724 — — —

Acquisition-related expenses 13,509 — 0.9 —

Income from operations 157,160 296,794 10.1 17.8

Other income (expense), net 830 4,229 0.1 0.3

Income before income tax expense 157,990 301,023 10.2 18.1

Income tax expense 42,557 79,430 2.7 4.8

Net income $ 115,433 $ 221,593 7.4 % 13.3 %

Net revenue decreased $110.8 million, or 7%, to $1.555 billion for the first two quarters of fiscal 2020 from $1.666 billion for the first two quarters of fiscal 2019.

On a constant dollar basis, assuming the average exchange rates for the first two quarters of fiscal 2020 remained constant with the average exchange rates for the first two quarters of fiscal 2019, net revenue decreased $96.1 million, or 6%.

The decrease in net revenue was primarily due to a decrease in company-operated store net revenue as well as a decrease in net revenue from our other locations driven by temporary retail location closures as well as reduced operating hours and

limited guest occupancy levels as a result of COVID-19.

This was partially offset by an increase in direct to consumer net revenue.

Net revenue on a segment basis for the first two quarters ended August 2, 2020 and August 4, 2019 is summarized below.

The percentages are presented as a percentage of total net revenue.

Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands) (Percentages)

Company-operated stores $ 547,171 $ 1,090,178 35.2 % 65.4 %

Direct to consumer 906,341 427,480 58.3 25.7

Other 101,392 148,009 6.5 8.9

Net revenue $ 1,554,904 $ 1,665,667 100.0 % 100.0 %

Company-Operated Stores .

Net revenue from our company-operated stores segment decreased $543.0 million, or 50%, to $547.2 million in the first two quarters of fiscal 2020 from $1.090 billion in the first two quarters of fiscal 2019.

The decrease in net revenue from our company-operated stores segment was primarily due to the impact of COVID-19.

All of our stores in North America, Europe, and certain countries in Asia Pacific were temporarily closed for a significant portion of the first two quarters of fiscal 2020.

Since re-opening our company-operated store net revenues have been impacted by COVID-19 restrictions including reduced operating hours and occupancy limits.

Direct to Consumer.

Net revenue from our direct to consumer segment increased $478.9 million, or 112%, to $906.3 million in the first two quarters of fiscal 2020 from $427.5 million in the first two quarters of fiscal 2019.

Direct to consumer net revenue increased 114% on a constant dollar basis.

The increase in net revenue from our direct to consumer segment was primarily a result of increased website traffic and improved conversion rates.

This was partially offset by a decrease in dollar value per transaction.

There was a shift in the way guests shopped in the first two quarters of fiscal 2020 as a result of COVID-19, with more guests shopping online instead of in-store.

During the second quarter of fiscal 2020, we held an online warehouse sale in the United States and Canada which generated net revenue of $43.3 million.

We did not hold any warehouse sales during the first two quarters of fiscal 2019.

Net revenue from our other segment decreased $46.6 million, or 31%, to $101.4 million in the first two quarters of fiscal 2020 from $148.0 million in the first two quarters of fiscal 2019.

This decrease was primarily the result of COVID-19, including temporary location closures, reduced operating hours, and occupancy restrictions.

Gross profit decreased $83.6 million, or 9%, to $823.9 million for the first two quarters of fiscal 2020 from $907.5 million for the first two quarters of fiscal 2019.

Gross profit as a percentage of net revenue, or gross margin, decreased 150 basis points, to 53.0% in the first two quarters of fiscal 2020 from 54.5% in the first two quarters of fiscal 2019.

The decrease in gross margin was primarily the result of:

• an increase in occupancy and depreciation costs as a percentage of revenue of 120 basis points;

• an increase in costs as a percentage of revenue related to our distribution centers of 110 basis points;

• an unfavorable impact of foreign exchange rates of 20 basis points.

This was partially offset by an increase in product margin of 80 basis points primarily due to lower product costs, and a favorable mix of higher margin product, partially offset by higher markdowns, and a decrease in costs related to our product departments as a percentage of revenue of 20 basis points.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $41.8 million, or 7%, to $652.5 million in the first two quarters of fiscal 2020 from $610.7 million in the first two quarters of fiscal 2019.

The increase in selling, general and administrative expenses was primarily due to:

• an increase in costs related to our operating channels of $55.2 million, comprised of:

– an increase in variable costs of $47.3 million primarily due to an increase in distribution costs as a result of increased direct to consumer net revenue;

– an increase in other costs of $30.6 million primarily due to increased digital marketing expenses;

– a decrease in employee costs of $22.7 million primarily due to lower incentive compensation expenses in our company-operated store and other channels;

• an increase in head office costs of $20.0 million, comprised of:

– an increase of $32.1 million primarily due to increases in information technology costs, depreciation, and brand and community costs;

– a decrease in employee costs of $12.1 million primarily due to decreased incentive compensation expense and decreased travel, partially offset by increased salaries and wages expense as a result of headcount growth;

• an increase in net foreign exchange and derivative revaluation losses of $1.8 million.

The increase in selling, general and administrative expenses was partially offset by $35.2 million of government payroll subsidies which were recognized during the first two quarters of fiscal 2020.

As a percentage of net revenue, selling, general and administrative expenses increased 530 basis points, to 42.0% in the first two quarters of fiscal 2020 from 36.7% in the first two quarters of fiscal 2019.

Amortization of intangible assets

Amortization of intangible assets was $0.7 million in the first two quarters of fiscal 2020.

This was primarily the result of the recognition of intangible assets of $85.0 million in the second quarter of fiscal 2020 as a result of our acquisition of MIRROR.

We did not recognize an expense for the amortization intangible assets in the first two quarters of fiscal 2019.

Acquisition-related expenses

As a result of our acquisition of MIRROR in the second quarter of fiscal 2020, we recognized acquisition-related expenses of $13.5 million in the first two quarters of fiscal 2020.

This included transaction and integration related costs of $9.2 million for advisory and professional services, and integration costs subsequent to the acquisition.

This also included acquisition-related compensation of $5.0 million for the partial acceleration of vesting of certain options and deferred consideration to certain continuing MIRROR employees.

Acquisition-related expenses were partially offset by a $0.8 million gain recognized on our existing investment.

We did not have acquisition-related expenses in the first two quarters of fiscal 2019.

Please refer to Note 3 to the unaudited interim consolidated financial statements included in Item 1 of Part I of this report for further information.

Income from Operations

Income from operations decreased $139.6 million, or 47%, to $157.2 million in the first two quarters of fiscal 2020 from $296.8 million in the first two quarters of fiscal 2019.

Operating margin decreased 770 basis points to 10.1% compared to 17.8% in the first two quarters of fiscal 2019.

On a segment basis, we determine income from operations without taking into account our general corporate expenses.

During the first quarter of fiscal 2020, we reviewed our segment and general corporate expenses and determined certain costs that are more appropriately classified in different categories.

Accordingly, comparative figures have been reclassified to conform to the financial presentation adopted for the current year.

Segmented income (loss) from operations for the first two quarters ended August 2, 2020 and August 4, 2019 is summarized below.

The percentages are presented as a percentage of net revenue of the respective operating segments.

Two Quarters Ended

August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019

(In thousands) (Percentage of segment revenue)

Segmented income (loss) from operations:

Company-operated stores $ (35,447) $ 275,227 (6.5) % 25.2 %

Direct to consumer 394,542 165,955 43.5 38.8

Other 2,318 29,041 2.3 19.6

361,413 470,223

General corporate expense 190,020 173,429

Amortization of intangible assets 724 —

Acquisition-related expenses 13,509 —

Income from operations $ 157,160 $ 296,794

Company-Operated Stores.

Income from operations from our company-operated stores segment decrease $310.7 million, or 113%, to a loss of $35.4 million for the first two quarters of fiscal 2020 from income of $275.2 million for the first two quarters of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $386.8 million which was primarily due to lower net revenue as a result of the impact of COVID-19 restrictions, and lower gross margin, which was primarily due to deleverage on occupancy and depreciation costs as a result of lower net revenue.

This was partially offset by a decrease in selling, general and administrative expenses, primarily due to decreased store operating expenses including lower incentive compensation, credit card fees, packaging costs, and distribution costs primarily as a result of lower net revenue, as well as decreases in security and repairs and maintenance costs, and due to the recognition of government payroll subsidies.

Income from operations as a percentage of company-operated stores net revenue decreased, primarily due to lower gross margin and deleverage on selling, general and administrative expenses.

Direct to Consumer.

Income from operations from our direct to consumer segment increased $228.6 million, or 138%, to $394.5 million for the first two quarters of fiscal 2020 from $166.0 million for the first two quarters of fiscal 2019.

The increase was primarily the result of increased gross profit of $325.3 million which was primarily due to increased net revenue and higher gross margin.

Income from operations as a percentage of direct to consumer net revenue increased 470 basis points, primarily due to leverage on selling, general and administrative expenses and higher gross margin.

Income from operations from our other channels decreased $26.7 million, or 92%, to $2.3 million for the first two quarters of fiscal 2020 from $29.0 million for the first two quarters of fiscal 2019.

The decrease was primarily the result of decreased gross profit of $22.2 million which was primarily due to decreased net revenue, and an increase in selling, general and administrative expenses primarily due to an increase in marketing costs, partially offset by decreased operating expenses including lower incentive compensation, credit card fees, and packaging costs primarily as a result of lower net revenue.

Income from operations as a percentage of other net revenue decreased primarily due to deleverage on selling, general and administrative expenses, partially offset by an increase in gross margin.

General Corporate Expense.

General corporate expense increased $16.6 million, or 10%, to $190.0 million for the first two quarters of fiscal 2020 from $173.4 million for the first two quarters of fiscal 2019.

This increase was primarily due to increases in information technology costs, depreciation, professional fees, and brand and community costs, and an increase in net foreign exchange and derivative revaluation losses of $1.8 million.

The increase in general corporate expense was partially offset by a decrease in incentive compensation and the recognition of government payroll subsidies.

Other Income (Expense), Net

Other income, net decreased $3.4 million, or 80%, to $0.8 million for the first two quarters of fiscal 2020 from $4.2 million for the first two quarters of fiscal 2019.

The decrease was primarily due to a decrease in net interest income.

Income Tax Expense

Income tax expense decreased $36.9 million, or 46%, to $42.6 million for the first two quarters of fiscal 2020 from $79.4 million for the first two quarters of fiscal 2019.

The effective tax rate for the first two quarters of fiscal 2020 was 26.9% compared to 26.4% for the first two quarters of fiscal 2019.

The increase in the effective tax rate was due to certain non-deductible expenses related to the MIRROR acquisition which increased the effective tax rate by 90 basis points and due to new regulations which resulted in additional foreign tax credits being recognized in the first two quarters of fiscal 2019.

This was partially offset by an increase in tax deductions related to stock-based compensation.

Net income decreased $106.2 million, or 48%, to $115.4 million for the first two quarters of fiscal 2020 from $221.6 million for the first two quarters of fiscal 2019.

This was primarily due to a decrease in gross profit of $83.6 million, an increase in selling, general and administrative expenses of $41.8 million, acquisition-related expenses of $13.5 million, amortization of intangible assets of $0.7 million, and a decrease in other income (expense), net of $3.4 million, partially offset by a decrease in income tax expense of $36.9 million.

Comparable Store Sales and Total Comparable Sales

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A constant dollar basis assumes the average foreign exchange rates for the period remained constant with the average foreign exchange rates for the same period of the prior year.

We provide constant dollar changes in net revenue and direct to consumer net revenue because we use these measures to understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates.

We believe that disclosing these measures on a constant dollar basis is useful to investors because it enables them to better understand the level of growth of our business.

We provide constant dollar changes in our results to help investors understand the underlying growth rate of net revenue excluding the impact of changes in foreign exchange rates.

The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or with greater prominence to, the financial information prepared and presented in accordance with GAAP.

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Quarter Ended

Direct to Consumer Net Revenue

(In thousands)

(Percentages)

August 2, 2020

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

Change $ 19,590 2 % 155 %

Adjustments due to foreign exchange rate changes 6,976 1 2

Change in constant dollars $ 26,566 3 % 157 %

Two Quarters Ended

August 2, 2020

Net Revenue Direct to Consumer Net Revenue

(In thousands) (Percentages) (Percentages)

Change $ (110,763) (7) % 112 %

Adjustments due to foreign exchange rate changes 14,650 1 2 %

Change in constant dollars $ (96,113) (6) % 114 %

Our business is affected by the general seasonal trends common to the retail apparel industry.

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Cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions, as well as in money market funds, treasury bills, and term deposits.

As of May 3, 2020 , our working capital, excluding cash and cash equivalents, was $240.0 million , our cash and cash equivalents were $823.0 million , and our capacity under our committed revolving facility was $398.2 million .

As of August 2, 2020, our working capital, excluding cash and cash equivalents, was $203.4 million, our cash and cash equivalents were $523.0 million, and our capacity under our committed revolving credit facilities was $697.7 million.

The following table summarizes our net cash flows provided by and used in operating, investing, and financing activities for the periods indicated:

Quarter Ended

Two Quarters Ended

August 2, 2020 August 4, 2019

(In thousands)

Total cash (used in) provided by:

Total cash provided by (used in):

Operating activities $ 60,062 $ 50,042

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Operating Activities

Cash flows used in operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.

Cash used in operating activities increased $58.4 million , to $121.2 million for the first quarter of fiscal 2020 compared to $62.8 million for the first quarter of fiscal 2019 , primarily as a result of a decrease of $68.0 million in net income primarily due to the impact of COVID-19, including temporary closures of company-operated stores.

This was partially offset by the following:

an increase of $6.0 million in non-cash expenses primarily related to an increase in depreciation, partially offset by a decrease in stock-based compensation expense;

Cash flows provided by operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense, and the effect of changes in operating assets and liabilities.

Cash provided by operating activities increased $10.0 million, to $60.1 million for the first two quarters of fiscal 2020 compared to $50.0 million for the first two quarters of fiscal 2019, primarily as a result of the following:

• an increase of $110.6 million in changes in operating assets and liabilities, primarily due to the following:

– an increase of $122.8 million related to income taxes, primarily due to the deferral of Canadian income tax payments to the third quarter of fiscal 2020 as well as payments for withholding taxes on repatriated foreign earnings in the first quarter of fiscal 2019;

an increase of $61.9 million related to other current and non-current liabilities primarily due to an increase in forward currency contract liabilities as a result of foreign exchange fluctuations, and an increase in the sales return allowance as a result of COVID-19 reducing in-period returns;

– an increase of $50.5 million related to other accrued liabilities, primarily due to increases in accrued duty, freight, and other operating expenses as well as an increase in the sales return allowance as a result of COVID-19 reducing in-period returns;

– an increase of $20.2 million related to accounts payable.

The increase in changes in operating assets and liabilities was partially offset by the following:

a decrease of $69.0 million related to inventories, primarily due to lower than expected net revenue as a result of the temporary store closures from COVID-19;

a decrease of $37.2 million related to other prepaid expenses and other current and non-current assets, primarily due to an increase in forward currency contract assets as a result of foreign exchange fluctuations;

– a decrease of $41.6 million related to accrued compensation related expenses;

a decrease of $25.1 million related to right-of-use lease assets and current and non-current lease liabilities.

– a decrease of $31.3 million related to prepaid expenses and other current and non-current assets, primarily due to government payroll subsidy receivables related to COVID-19;

– a decrease of $12.4 million related to inventories, primarily due to lower than expected net revenue as a result of temporary store closures and other COVID-19 restrictions.

• an increase of $5.6 million from adjustments to reconcile net income to net cash provided by operating activities other than changes in operating assets and liabilities, primarily related to an increase in depreciation and amortization, partially offset by a decrease in the settlement of derivatives not designated in a hedging relationship.

The increase in cash provided by operating activities was partially offset by a decrease of $106.2 million in net income, primarily due temporary retail location closures as well as reduced operating hours and limited guest occupancy levels as a result of COVID-19.

Investing Activities

Cash flows used in investing activities relate to capital expenditures, the settlement of net investment hedges, and other investing activities.

The capital expenditures were primarily for opening new company-operated stores, remodeling or relocating certain stores, and ongoing store refurbishment.

Cash flows used in investing activities relate to the acquisition of MIRROR, capital expenditures, the settlement of net investment hedges, and other investing activities.

Capital expenditures primarily relate to opening new company-operated stores, remodeling or relocating certain stores, and ongoing store refurbishment.

We also had capital expenditures related to information technology and business systems, related to corporate buildings, and for opening retail locations other than company-operated stores.

Cash used in investing activities decrease d $18.3 million to $45.6 million for the first quarter of fiscal 2020 from $63.9 million for the first quarter of fiscal 2019 .

The decrease was primarily the result of adjusting our investments in light of COVID-19.

This included decreasing our corporate capital expenditures on information technology and business systems as well as decreasing our capital expenditures for renovations and relocations of our company-operated stores.

Cash used in investing activities increased $413.4 million to $545.3 million for the first two quarters of fiscal 2020 from $132.0 million for the first two quarters of fiscal 2019.

The increase was primarily the result of the acquisition of MIRROR, partially offset by a decrease in capital expenditures for our company-operated stores.

Financing Activities

Cash flows used in financing activities consist primarily of cash used to repurchase shares of our common stock, certain cash flows related to stock-based compensation, and other financing activities.

Cash used in financing activities decrease d $79.7 million to $90.6 million for the first quarter of fiscal 2020 compared to $170.3 million for the first quarter of fiscal 2019 .

The decrease was primarily the result of a decrease in our stock repurchases.

Our cash used in financing activities for the first quarter of fiscal 2020 included $63.7 million to repurchase 0.4 million shares of our common stock compared to $163.5 million to repurchase 1.0 million shares for the first quarter of fiscal 2019 .

During the first quarter of fiscal 2019, we repurchased 1.0 million shares in a private transaction.

We did not purchase any shares in a private transaction during the first quarter of fiscal 2020.

Cash used in financing activities decreased $88.8 million to $82.2 million for the first two quarters of fiscal 2020 compared to $171.0 million for the first two quarters of fiscal 2019.

The decrease was primarily the result of a decrease in stock repurchases.

Cash used in financing activities for the first two quarters of fiscal 2020 included $63.7 million to repurchase 0.4 million shares of our common stock compared to $165.1 million to repurchase 1.0 million shares for the first two quarters of fiscal 2019.

During the first two quarters of fiscal 2019, 1.0 million shares were repurchased in a private transaction.

We did not purchase any shares in a private transaction during the first two quarters of fiscal 2020.

The other common stock was repurchased in the open market at prevailing market prices, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, with the timing and actual number of shares repurchased depending upon market conditions, eligibility to trade, and other factors.

As of March 31, 2020, we temporarily paused our share repurchase program.

We believe that our cash and cash equivalent balances, cash flows from operations, and borrowings available to us under our revolving credit facilities will be adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.

Our cash from operations may be negatively impacted by a decrease in demand for our products, the continuing impact of COVID-19, as well as the other factors described in Item 1 of Part II of this Quarterly Report on Form 10-Q.

In addition, we may make discretionary capital improvements with respect to our stores, distribution facilities, headquarters, or systems, or we may make strategic investments or repurchase shares under an approved stock repurchase program, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.

The share repurchase program was temporarily paused as of March 31, 2020.

We believe the cash and cash equivalent balances, cash flows from operations, and borrowings available under the revolving credit facilities are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.

The cash from operations may be negatively impacted by a decrease in demand for our products, the continuing impact of COVID-19, as well as the other factors described in Item 1 of Part II of this Quarterly Report on Form 10-Q.

In addition, discretionary capital improvements may be made with respect to the stores, distribution facilities, headquarters, or systems.

Strategic investments or repurchase of shares under an approved stock repurchase program may be made, which we would expect to fund through the use of cash, issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations.

Revolving Credit Facilities

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If an event of default occurs, the credit agreement may be terminated and the maturity of any outstanding amounts may be accelerated.

As of May 3, 2020 , we were in compliance with the covenants of the credit facility.

As of August 2, 2020, we were in compliance with the covenants of the credit facility.

On June 6, 2018, we entered into Amendment No.

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In addition, the Amendment decreased the applicable margins for LIBOR loans from 1.00%-1.75% to 1.00%-1.50% and for alternate base rate loans from 0.00%-0.75% to 0.00%-0.50%, reduced the commitment fee on average daily unused amounts under the revolving facility from 0.125%-0.200% to 0.10%-0.20%, and reduced fees for unused letters of credit from 1.00%-1.75% to 1.00%-1.50%.

As of May 3, 2020 , aside from letters of credit of $1.8 million , we had no other borrowings outstanding under this credit facility.

As of August 2, 2020, aside from letters of credit of $2.3 million, we had no other borrowings outstanding under this credit facility.

Mainland China revolving credit facility

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We are required to follow certain covenants.

As of May 3, 2020 , we were in compliance with the covenants.

As of May 3, 2020 , there were immaterial borrowings outstanding under this credit facility.

As of August 2, 2020, we were in compliance with the covenants.

As of August 2, 2020, there were no borrowings outstanding under this credit facility.

364-Day revolving credit facility

On June 29, 2020, we entered into a 364-day credit agreement providing for a $300.0 million committed and unsecured revolving credit facility.

The credit agreement matures on June 28, 2021.

Bank of America, N.A., is administrative agent and swing line lender.

Borrowings under the credit facility may be prepaid and commitments may be reduced or terminated without premium or penalty (other than customary breakage costs).

Borrowings made under the credit facility bear interest at a rate per annum equal to, at our option, either (1) a rate based on the rates applicable for deposits on the interbank market for U.S.

Dollars or the applicable currency in which the borrowings are made (“LIBOR”) or (2) an alternate base rate, plus, in each case, an applicable margin.

The applicable margin is determined by reference to a pricing grid, based on the ratio of indebtedness to earnings before interest, tax depreciation, amortization, and rent (“EBITDAR”) and ranges between 1.50%-2.25% for LIBOR loans and 0.50%-1.25% for alternate base rate or Canadian prime rate loans.

Additionally, a commitment fee of between 0.25%-0.55%, also determined by reference to the pricing grid, is payable on the average daily unused amounts under the credit facility.

The credit agreement contains negative covenants that, among other things and subject to certain exceptions, limit the ability of our subsidiaries to incur indebtedness, incur liens, undergo fundamental changes, make dispositions of all or substantially all of their assets, alter their businesses and enter into agreements limiting subsidiary dividends and distributions.

We are also required to maintain a consolidated rent-adjusted leverage ratio of not greater than 3.50:1.00 and we are not permitted to allow the ratio of consolidated EBITDAR to consolidated interest charges (plus rent) to be less than 2.00:1.00.

The credit agreement also contains certain customary representations, warranties, affirmative covenants, and events of default (including, among others, an event of default upon the occurrence of a change of control).

If an event of default occurs, the credit agreement may be terminated, and the maturity of any outstanding amounts may be accelerated.

As of August 2, 2020, we were in compliance with the covenants.

As of August 2, 2020, there were no borrowings outstanding under this credit facility.

Off-Balance Sheet Arrangements

We enter into standby letters of credit to secure certain of our obligations, including leases, taxes, and duties.

As of May 3, 2020 , letters of credit and letters of guarantee totaling $1.8 million had been issued.

As of August 2, 2020, letters of credit and letters of guarantee totaling $2.3 million had been issued.

We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

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An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements.

Our critical accounting policies and estimates are discussed in our fiscal 2019 Annual Report on Form 10-K filed with the SEC on March 26, 2020 , and in Notes 1 , 2 , 5 , and 6 , included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Our critical accounting policies and estimates are discussed in our fiscal 2019 Annual Report

on Form 10-K filed with the SEC on March 26, 2020, and in Notes 1, 2, 3, 8, and 9, included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Operating Locations

Our company-operated stores by country as of May 3, 2020 and February 2, 2020 are summarized in the table below.

Our company-operated stores by country as of August 2, 2020 and February 2, 2020 are summarized in the table below.

2020 February 2,

United States 309 305

People's Republic of China (1)

Australia 31 31

United Kingdom 15 14

New Zealand 7 7

South Korea 7 5

Singapore 4 4

Netherlands 1 1

Switzerland 1 1

Total company-operated stores 506 491

Included within PRC as of May 3, 2020 , were seven company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and one company-operated store in Taiwan, PRC.

(1) Included within PRC as of August 2, 2020, were seven company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and two company-operated store in Taiwan, PRC.

As of February 2, 2020, there were six company-operated stores in the Hong Kong Special Administrative Region, two company-operated stores in the Macao Special Administration Region, and one company-operated store in Taiwan, PRC.

As of May 3, 2020 , all of our retail locations in North America, Europe, and certain countries in Asia Pacific were temporarily closed as a result of COVID-19.

Our retail locations have experienced temporary closures during the first two quarters of fiscal 2020 as a result of COVID-19.

As of August 2, 2020, 492 of our company-operated stores were open.

Retail locations operated by third parties under license and supply arrangements are not included in the above table.

As of May 3, 2020 , there were eight licensed locations, including four in Mexico, three in the United Arab Emirates, and one in Qatar.

As of August 2, 2020, there were eight licensed locations, including four in Mexico, three in the United Arab Emirates, and one in Qatar.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis